Here we go. Inflation data and PPI came in showing slowing inflation. That is what almost everybody expected yet it came as a surprise to Wall Street. It still amazes me how irrational the markets are. But it could be because of media which feed us with their bullshit headlines every day trying to tell us what just happened. One day, it is the “investors are digesting the FED”, next day the “fear of higher for longer” followed by “unexpected” fall of PPI.

 

Wall Street is always surprised!

 

When I started trading futures I entered a trade which stopped me out in a few days. After reviewing my trade journal I came to a conclusion that I entered the trade too early and I should have waited. It was one of the days when Wall Street was freaking about too strong labor market that could curb the FED’s interest rates cut.

 

 

No matter how much my perception of the markets are skewed by media, I still think they are fools. That’s why I try not to watch news or read articles about the stock market. It is all nonsense.

 

I wanted to trade avoiding news that could surprise the markets

 

So I decided to add an economic calendar to my blog so I can easily and quickly see when there are any news that could pleasantly or unpleasantly surprise Wall Street. My thinking was: avoid days when the FED does anything and trade only during the days when nothing is going on.

Heck! There is something going on every stupid week! That reminded me of famous words spoken by the legendary Peter Lynch: “There will always be something to worry about in the stock market.”

That man is a legend! It is something every week – housing data, labor data, PPI, CPI, PMI, consumer confidence, you name it. If I wanted to trade only during days when nothing is happening, I wouldn’t be trading at all!

 

Back to the media

 

So what is a solution to this mess? Going back to media and try to figure out what is actually happening. But not what the media think investors are digesting, but news about economic data and overall health. And that is hard to find. 99% of market and economic news is bullcrap not worth looking at. This is the hardest part. Find a source that provides meaningful information on where the economy is heading. Some commentators are worth following and from their reports you can asses what is the most likely outcome. On the latest inflation news? It was obvious that inflation was easing. Maybe not as fast as some would wish for, but it was easing. Thus the reports about Wall Street being surprised was laughable.

 

My metrics to avoid any surprise

 

But I wanted more mechanical approach to assessing of what is going on. I found a few metrics that can do that and provide early warnings. One is volatility, and the second is greed or fear of the market’s participants and their behavior in the markets. Combining these two together, I can have some valuable insight into the markets as a herd tossed around by human psychology:
 

 

These two gauges tell me all I need to know – volatility crashed, and the markets are not yet too crazy. That is extremely bullish. This tells me to go all in (not exactly, but be aggressive). And when both gauges go crazy (volatility high and markets high), it tells me to get out as fast as I can. Crash will be imminent and Wall Street, in its euphoria, is not yet aware of it.

And when volatility is high and the markets are high, it will usually follow by volatility even higher and markets crash. But when that happens, I will be out. Hopefully.

 

Scaling trades

 

And that helps me to determine how aggressive I can be. Today, I can be aggressive. But when the markets change, I might stop scaling the trades, reducing trades by opening fewer new trades, or get out immediately at all cost. That is still personal, but I am working on eliminating that “personal” aspect to make it mechanical.

I am now fully mechanical with stocks, ETFs, and futures. When the proverbial shit hits the fan, I rotate to defensive assets (stocks and ETFs) and use a stop loss (for futures). But I am still trying to figure out how to deal with options. It is easy to scale down, I just let the old trades expire and open fewer trades, but if I have to get out sooner than that, it may mean closing positions at a loss and that is something I am not keen on.

So, still work to do.

However, as of today, I am still pleased with the rapid change in my portfolio. After repositioning my holdings and trades, my portfolio went up significantly beating the benchmark and I hope, it will stay like that in the future.

 

 

If you do not want any surprises in your portfolio subscribe to my newsletter. Every week, I will share with you what the Wall Street does and whether you should go all in or stay aside. You will be surprised how well that works. You will be getting out while other are still piling up their holdings and you will be buying back in when they are dumping everything they previously bought up.